How to Avoid Becoming a Landlord
Most people who rent their primary home do so for 1 of 2 reasons: they either plan to move into the home themselves at some future date or they can’t afford to sell it. For those who find themselves in the second camp, don’t despair. You have options.
A lender will try to limit their losses to the greatest extent possible. As this relates to home loans where the borrower owes more than their home is worth, lenders will almost always consider allowing a short sale. A short sale occurs when a home is sold for a price that’s less than the loans against it. In this case, the lenders agree to accept less than the full amount of the loans that they are owed. For example: John needs to sell his home because his employer is moving him to Alabama. He has a $100,000 loan balance from XYZ Bank against the home, but the highest offer he’s received is $80,000. To minimize its losses, XYZ Bank tells John he can proceed with a short sale and that it will clear the $100,000 lien on the home for $80,000.
Besides being a loss mitigation tool for lenders, short sales have tremendous advantages for homeowners:
- The deficiency, or difference between what a home sells for and what is owed, is often reduced or forgiven completely by the lender.
- Lenders will almost always pay brokerage fees and closing costs for the homeowner.
- The impact of a short sale on an individual credit score is far less than that of a foreclosure.
- Homeowners do not have to become landlords.
It sounds to good to be true, you say? There are limitations to short sales, both in who qualifies and how they may proceed. For one, lenders always have final say over the sales price and will likely have a price opinion done to establish a fair value for the home. If the offers you have are lower than the lender’s price opinion, expect to put the home back up for sale. Also, you will have to show the lender that you have an economic or financial hardship that necessitates you sell your home. This last item is subjective and the metrics used to establish hardship will vary greatly from lender to lender.
If you think a short sale may be for you, it’s best to start by seeking the advice of a HUD approved housing counselor or real estate attorney.